Competition from ACeS--bad for G*(I've added some facts on ACeS from the full report at the bottom of this page)
Restart of M2A--good for Loral
********************************
ING Barings Satellite Research Group
********************************
February 7, 2000
Pasifik Satellit Nusantara(PSNRY) - BUY
Initiating Coverage with a BUY Rating, $32 Price Target, Potential for
Meaningful Upside.
PLEASE SEE ATTACHED
We are initiating coverage of Pasifik Satellit Nusantara (PSN) with a BUY
rating and a $32 Year-End
2000 price target based on our sum of the parts valuation. There is
potentially significant upside
to our rating and price target if the ACeS Garuda-1 satellite is
successfully deployed and M2A draws
credible partners.
For example, if we were to apply the same 16% discount rate as we do with
Globalstar
Telecommunications Ltd.~? (OTC: GSTRF-34), our price target would be $63. We
believe that PSN has the
right satellite assets, strategy and management to provide
telecommunications and media services to most
of Asia where tremendous demand for telecomm services exists with a very
short supply of telecomm
infrastructure.
Company Description:
Pacifik Satelit Nusantara (PSN) is a leading provider of advanced satellite
based telecommunications
services within the Asia Pacific region and participates through
subsidiaries in several business segments.
These businesses currently include fixed rural and private line telephony
(Xpress Connection ) , regional
mobile satellite telephony (ACeS), fixed broadband, Internet access, voice
and video services (M2A) and
satellite transponder leasing.
Key Points:
ú ACeS - Strong Demand, Little Supply for Telephony
We expect ACeS to be a successful mobile satellite telephone and competitive
long-distance provider
in Asia with roughly 1.7 billion POPs and roughly 400 million GSM users over
10 years. ACeS is a
Geo satellite based mobile phone and long-distance communications system
based on GSM. PSN
operates ACeS, is a 35% owner and the National Service Provider (NSP) for
Indonesia. We expect
ACeS to benefit from two significant demand drivers; the huge demand for
wireless services
throughout Asia and a "long-distance arbitrage" opportunity to provide
less-expensive long distance
traffic over satellite than is currently available on terrestrial routes.
ú M2A likely to be revived, representing significant potential upside.
The combination of rebounding Asian economies and tremendous demand for
broadband services
should lead to the revival of the M2A project, potentially with new,
meaningful partnerships. The
project had been suspended due to the adverse economic conditions in January
1998.
Multi-Media Asia, commonly known as M2A, is a broadband satellite system
designed to provide video, telephone,
data and fax communication services directly to the home and to businesses
throughout Asia. PSN
owns 73% while Indosat owns the balance. We currently have given the M2A
project no consideration
in our sum of the parts valuation. If revived, M2A should represent
significant valuation upside, with
potential to exceed that of ACeS.
ú Transponder Leasing: Predictable cash flow although a nominal portion of
future valuation.
PSN currently owns 8 transponders on two separate satellites over the Asian
Pacific region. 2 standard
C-band transponders on Agila-II and 6 extended C-band transponders on
Palapa-C1. PSN's core tenant
is News Corps' Star-TV with end of life leases of 2 transponders on
Palapa-C1. In 1999, transponder
leasing provided $7.1 million of revenues to the company.
ú Xpress Connection, Private Line Rural Telephony
PSN provides rural telephone and private line services to villages
throughout Indonesia. The service
uses a transponder on the Palapa-C1 satellite. PSN has experienced very
strong demand for these
telephone services, with 2,000 fixed terminals deployed so far with usage
rates exceeding 800 minutes
of use (MOU) monthly. We e4xpect PSN to expand these services to other
countries, potentially
including the Philippines, Papua New Guinea, India, Bangladesh, and
Pakistan. We expect this
segment of PSN's business to generate $4.1 million in 2000 revenue.
Potential Near-term Catalysts Exist.
ú Launch of Garuda/ACeS Satellite - Mid- February 2000
ú Launch of ACeS service. Expected 3-6 months after successful launch.
ú New ACeS National Service Provider announcements, hopefully China. -12
months.
ú M2A Revival - Potentially within 6 months
ú M2A Parternships - Potentially within 6 months
ú Expansion of Xpress Connection territories; candidates include the
Philippines, Papua New
Guinea, India, Bangladesh, and Pakistan - Potentially within12 months.
ú Expansion of Xpress Connection services to Internet access.
Risks are Significant
ú Garuda-1 Satellite Launch and Deployment Risk -
The entire ACeS project is contingent on one geosynchronous satellite, the
Garuda 1. Therefore, any
launch failure or subsequent in-orbit anomaly would impair service for a
minimum of one year. ACeS
is fully insured against such an event and has already ordered lead parts
for a second satellite that could
serve as a replacement for the Garuda-1.
ú Emerging Market & Currency Risk
Many of the Asian countries served by ACeS have historically experienced
severe economic and
political volatility. Currencies in SouthEast Asia fell dramatically
relative to the dollar in 1998, which
adversely affects PSN since it purchases equipment for its projects in U.S.
dollars while governments
in Asia were tightening available credit making it more difficult for
borrowing. Today, many of these
countries are beginning to expand again and have settled their political
difficulties. In fact, the
opportunity is very exciting since many of these countries may experience
growth levels above the
United States over the next decade. However, there remains no assurance that
the region will not
encounter the challenges of 1998 in the near future.
Financial Discussion and Valuation
Financial Discussion
We believe that PSN has the opportunity to generate exceptionally strong
growth over the next decade as
the ACeS project and the company's NSP operation flourish. Revenues could
achieve the $839.7 million
by 2009 from $20.2 million during 2000, a CAGR of 51.3%. Excluded from
revenues are PSN's interest in
ACeS which can be found in the Other Income line as well as M2A which we
have not modeled at this
time. The important Equity in the Net Gain of an Investee line (ie. PSN's
34.73% interest in ACeS) on the
income statement should rise to $260.4 million in 2009 from negative $33.5
million during 2000. On an
EBITDA basis, we expect $310.2 million or $11.46/share by 2009 up from a
loss of $4.09 during 2000.
Valuation
We are establishing a Y/E2000 price target of $32 based on our sum of the
parts valuation methodology.
However, our number rises to roughly $62 YE2000 and $74 YE2001 when we apply
a similar discount rate
of 16.0% as we have on Globalstar to the ACeS business.
For the Xpress Connection and Private Line businesses, we have applied a 14x
multiple on 2002 estimated
EBITDA to reach a $3.00 valuation at that juncture. Discounting back by
roughly 18.0% per annum
supports our $2.15 year-end 2000 valuation.
We believe PSN's ownership interest in ACeS is worth almost $20/share while
its right to serve as the
National Service Provider of Indonesia is worth roughly $17.50/share. A
20.0% discount rate and a 6.5%
terminal growth rate, 7.9x 2009E EBITDA, is utilized to reach the valuation
numbers.
We reached the value of the FSS business by applying an 11x, 10x and 9x
multiple to our 2000,2001, and
2002 EBITDA estimates. Finally, we subtracted the estimated debt on the
balance sheet and added our
estimated cash figures to reach our target prices listed below.
<<>>
Some ACeS facts--other significant owners include Philippine Long Distance, Lockheed, Jasmine of Thailand. These are places where G* has no offering of service(Indonesia, Philippines, Thailand). Cost will be ~$1/minute. Capacity is ~3 billion minutes/year. Service providers in Indonesia, Bangladesh, India, Pakistan, Philippines, Sri Lanka, Taiwan, and Thailand. Capable of 150K data. Phone retails for $900 to start, weighs 200 grams, and the antenna is detachable. |
